The global economic growth dynamic has gained some traction lately. This momentum is forecast to continue in 2017. Hence, the global GDP growth forecast was revised up by 0.1 percentage point for both 2016 and 2017, lifting global growth to 3.0% and 3.2%, respectively. It is mainly the OECD economies that have seen some improvements to their growth dynamic, which has been reflected in slightly higher forecasts for the US, Japan and the Euro-zone in 2017. Overall OECD growth in 2017 was revised up from 1.7% to 1.8%. These revisions have been based on current underlying economic developments and do not reflect fiscal stimulus measures in the US or other policy decisions that could have positive impacts. Moreover, a continued rebalancing of the oil market after the historic OPEC/nonOPEC agreement of 10 December could lift growth further, as it may lead to improvements in the output of producer economies, along with once again rising investments.
In emerging economies, the improving oil sector and sound domestic economic developments have lifted Russian economic growth by 0.1 percentage point (pp) in both 2016 and 2017. Russia now registers a contraction of 0.5% and modest growth of 0.9%, respectively. After the removal of large denominated bills in India caused some dampening of domestic consumption, growth for 2016 has now been revised down to 7.2%, but remains unchanged at 7.1% for 2017. The forecasts for Brazil and China remain unchanged. While Brazil is forecast to recover to 0.4% in 2017, after a deep recession of 3.4% in 2016, China continues to enjoy solid growth of 6.2% in 2017, following 6.7% a year earlier.
Among the most important uncertainties for global economic growth, policy issues across the globe bear considerable weight, as do monetary policy decisions, which remain important in the near term. Given the inflationary support, also due to the ongoing rebalancing of the oil market, it is expected that the normalisation of US Federal Reserve (Fed) monetary policy will continue in 2017. This may also apply to other major central banks but, in comparison, a relatively more accommodative stance is expected, particularly from the European Central Bank (ECB) and the Bank of Japan (BoJ).
The US economy continues to grow at healthy levels with continuous improvements in the labour market, rising inflation and lead indicators that point at continued rising output. This seems to be a solid base for higher 2017 growth, compared with 2016, which was mainly impacted by low growth in the first half. It remains unclear to some extent which policies will be implemented by the incoming US Administration, but fiscal policy decisions will certainly need close monitoring.
3Q16 GDP growth was reported to be stronger in the final of three estimates at 3.5% q-o-q on a seasonally adjusted annualized rate (SAAR), compared to an already solid first estimate of 2.9% and a second estimate of 3.2%. The most important supportive factor was ongoing solid private household consumption, which rose by 3.0% q-o-q SAAR. Moreover, private investment also grew by 3.0% q-o-q SAAR. Exports also supported GDP significantly, as they grew by 10.0% q-o-q SAAR. While the low 1H16 growth has kept full year GDP growth clearly below the 2%-mark, the economy is forecast to continue with stronger 2H16 momentum into 2017. Depending on the implementation of further fiscal stimulus measures, there may be even some more upside. However, it is important to note that with the ongoing economic momentum, too much fiscal stimulus may even lead to growth that triggers a fasterthan-currently-anticipated interest rate hiking cycle by the Fed which has the potential of generating negative spill-overs onto emerging economies. Monetary policies will most probably become an important area to monitor in the coming months. As fiscal stimulus measures may well become a key factor in the achievement of higher growth in the near-term, monetary policies will need to reflect such a development. Hence, monetary stimulus is expected to become a less important factor supporting economic growth and, thus, liquidity may fall. Consequently, market volatility may be set to rise, while the oil market could also be impacted.
The recent upward momentum of the labour market continued in the latest December readings. The unemployment rate increased slightly to 4.7% in December, while non-farm payroll additions rose by 156,000 in December, after an upward revision of 204,000 in November. Average hourly earnings improved significantly, growing by 2.9% y-o-y.
The development in industrial production remains soft, but the decline rates are lower than in past months, mainly due to an improved situation in the energy sector. Industrial production declined by 0.6% y-o-y in November, after contracting 0.8% y-o-y in October. Mining, which includes oil sectorrelated output, fell considerably by 4.6%. This decline rate is the lowest in more than a year.
The positive trend in private household consumption, given recent GDP numbers, was considerably supported by the latest retail sales numbers. Retail sales growth in December stood at 4.1% y-o-y, even higher than the already strong November level of 3.9% y-o-y. This positive trend was also visible in the Conference Board’s Consumer Confidence Index, which increased strongly to a level of 113.7, the highest level since 2007 and a strong indication that economic conditions are improving.
July’s Purchasing Manager’s Index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), also indicated improvements in the underlying economy as the manufacturing PMI moved higher to reach 54.7 in December, higher than the 53.2 seen in November. The important services sector index remained at an elevated level of 57.2 for the second consecutive month in December.
Given the better-than-expected 2H16 performance and the expectation that this growth dynamic will continue in the current year, the GDP growth forecast for 2017 was lifted from 2.1% to 2.2%. More data over the coming months and better insights into fiscal stimulus plans of the incoming Administration will provide a sounder overview for a more detailed assessment of the situation of the US economy. The 2016 growth estimate remains unchanged at 1.6%.
The economy of Canada continues to improve slightly, along with a better situation in the US, its most important trading partner, as well as improvements in the oil sector. After 3Q16, GDP growth was announced at 3.5% q-o-q SAAR, while industrial production continued its growth trend. In October it rose by 1.9% y-o-y, after a rise of 3.3% in September. Output from the mining, oil and gas sector remained an important driver, with overall sector growth of 3.2% y-o-y. Also, the PMI for manufacturing improved and rose to 51.9 in December, compared to 51.5 in November. Consequently, the GDP growth forecast for 2016 was revised up to 1.3%, from 1.2% in the previous month. The 2017 GDP growth forecast remains unchanged at 1.7%.
OECD Asia Pacific
Japan has seen some uplifting momentum very recently for two reasons: First, the underlying growth momentum, domestically and externally, seems to have improved. Secondly, GDP accounting was revised, according to the United Nations’ System of National Accounts 2008 (SNA 2008), leading to higher growth levels, since the changes imply that growth levels in the recent past seem to have been slightly higher than originally accounted for. In general, most parameters have improved. Domestic demand has risen significantly, the decline in exports has come to a halt, inflation levels have risen to healthier levels and the labour market’s tightness is forecast to continue.
3Q16 GDP grew by 1.3% q-o-q SAAR, supported by domestic consumption and a better situation in exports. The further development of the Japanese yen will also need close monitoring in this respect, but its recent weakness should lead to Japanese products being more competititve. Positively, and in line with the most recent improvements in the economy, the deflationary trend has turned and the efforts of the Bank of Japan (BoJ) may have also been supported by the developments in the oil market.
Inflation rose again in November to reach 0.5% y-o-y, after it had turned positive in October, when it stood at 0.2% y-o-y. Given the strengthening of oil prices recently, and the global impact of again rising inflation, this trend may continue. When excluding the two volatile groups of energy and food, the country’s core inflation figure stood at only 0.1% in November, compared to 0.2% in October. Positively, real income continued to rise with pay increases of 0.6% y-o-y in November and 0.3% a month earlier. The rising income pattern is also supported by the very low unemployment rate, which stood at only 3.1% in November.
Japanese exports were almost flat in November, compared to large declines in the past months, now probably also supported by an again weakening Japanese yen. On a non-seasonally adjusted level, November exports fell by only 0.4% y-o-y, compared to October’s decline of 10.3% y-o-y. Industrial production recovered significantly and rose for the fourth month in a row, up by 2.9% y-o-y in November. Additionally, the negative trend in manufacturing orders turned positive. Manufacturing orders increased by 10.4% y-o-y in November, after seeing a decline of 6.0% y-o-y in October. The improving environment has also been reflected in domestic demand. Retail trade recovered sharply and rose by 1.7% y-o-y, after multiple months of decline.
The latest PMI numbers provided by IHS Markit also confirmed the ongoing improvements. The PMI for manufacturing rose to 52.4 in December, compared to 51.3 in November. The services sector PMI also improved to stand above the growth-indicating level of 50 for a third consecutive month, rising to 52.3 in December from 51.8 in November.
By considering the improving underlying momentum, growth forecast for both 2016 and 2017 were revised up by 0.2 pp. The 2016 economic growth forecast now stands at 1.0%, compared to 0.8% in the previous month. The 2017 GDP growth forecast was lifted to 1.1% from 0.9% a month earlier. Numerous challenges persist and it remains to be seen to what extent the current improvements in the global economy and the ongoing stimulus measures will be able to lift growth above current forecast levels.
Although the situation in the South Korean economy remains challenged by the latest political turbulence, it still seems to weather this relatively well. Exports rose significantly in December, increasing by 7.6% y-o-y after an already healthy level of 3.2% y-o-y a month earlier. Industrial production also rose by 3.8% y-o-y in November, compared to 1.7% y-o-y in the previous month. However, the latest PMI number for the manufacturing sector in November still indicates a declining momentum in the manufacturing sector. The index improved slightly to 49.4 in December from 48.0 in November but continued to remain below the growth-indicating level of 50. While near-term developments warrant close monitoring, the GDP growth forecast for this month remains unchanged at 2.6% for 2016 and 2.5% for 2017.
The Euro-zone’s economic performance has lately been surprisingly somewhat to the upside. Growth seems to still be supported by healthy domestic demand and exports are also benefitting from the relatively weak euro. The current growth dynamic seems to be quite broad-based, while Germany, and to some extent France, remain the geographic regions that are principally supporting the recovery trend, considering that they represent around half of the Euro-zone’s economy. Moreover, Spain and some peripheral economies are also enjoying a rebound from past years’ low levels, while Italy is still doing relatively less well. This most recent broad momentum, in combination with the weaker euro, has also led to higher inflation and hence it remains to be seen how the ECB will proceed with its monetary stimulus, which seems to carry less weight in the current economic environment.
So far, the ECB has announced that it will continue its asset purchases until the end of 2017. But towards year-end, the development of interest rates remains to be seen, as inflation is seeing solid support from the labour market, commodity prices and housing. The unemployment rate has remained below 10% for two consecutive months. Moreover, banking sector-related weakness seems to have abated to some extent, while challenges in Italy remain. Also, the looming hard exit of the UK from the EU is adding some concern. With government elections in the Netherlands, Italy, France and Germany, the economic situation will continue to be influenced by political developments.
More positively, 3Q16 GDP growth was confirmed at 0.4% q-o-q seasonally adjusted growth rate, up from 2Q16 when growth stood at 0.3% and only slightly below the 0.5% reached in 1Q16. Current estimates for 4Q16 show similar growth as in 3Q16 and some slight appreciation of quarterly growth in 2017.
The latest industrial production figures were volatile to some extent, but have recently confirmed that the business environment remains in expansionary territory. After growth of only 0.8% y-o-y in October, November’s appreciation stood at a considerable 3.0% y-o-y. Manufacturing growth stood at a firm 2.7%. Retail sales growth in value terms increased as well, by 2.2% y-o-y in November, after 2.8% in October, signalling ongoing improvements in the underlying economy. Some support may still come from slight improvements in the labour market. The unemployment rate in the Euro-zone continued at below the 10.0% mark as it stood at 9.8% in November, the same as a month earlier.
Following the latest rounds of ECB stimulus and supported by an adjustment in oil prices, inflation increased to a healthier level of 1.1% y-o-y in December, after reaching 0.6% y-o-y in the previous month. Core inflation – the CPI excluding energy, tobacco and food ? stood at 0.9% y-o-y, rising from 0.8% a month earlier. This inflationary dynamic will remain an area that the ECB will closely consider in its upcoming monetary decisions. Among other reasons, this trend has also been a factor for the ECB to reduce its monetary stimulus programme. The effectiveness of the monetary stimulus – not only in terms of inflation, but also in terms of credit supply – has increased lately. In November, credit supply increased by 1.3% y-o-y for the third consecutive month, recovering from levels below 1% for all of 2016 prior to September.
The latest PMI indicators point to a continuation in Euro-zone improvements as well. The manufacturing PMI rose to 54.9 in December, from 53.7 in the previous month. The important services PMI was almost unchanged at 53.7 in December vs 53.8 a month earlier.
Supported by ongoing improvements, the 2017 GDP growth forecast for the Euro-zone was revised up slightly to 1.4% from 1.3% in the past month. However, this growth level is slightly below 2016 growth, which is estimated at 1.6%, unchanged from the previous month. The lower level of growth in the current year anticipates the challenges from political developments in 2017, given key elections in France and Germany, and the vagueness about Brexit procedures, which may all lead to rising uncertainty. This is to be seen in combination with some likelihood of rising inflation and hence a potential reduction in monetary stimulus.
The UK’s process of exiting the EU remains uncertain and is expected to impact the economy negatively this year and probably for longer, though so far the economic consequences have been limited. The country’s 2016 economic performance was even better than expected as developments during the second half were robust. Not only did exports benefit from a weakening pound, but domestic consumption also held up well. However, uncertainty will remain for the coming months and is expected to negatively impact the economic developments of the UK in 2017. Still, the ruling of the Supreme Court, which has to decide upon the formal involvement of parliament in the negotiations, needs to be awaited, though it is expected that they will have a ruling by January. If the government appeal at the Court is rejected, a debate will take place to approve the exit negotiations in parliament. Hence, a bill will likely only be passed after some delays and amendments. While it seems that the March deadline to trigger Article 50 may be met, such an outcome could create further uncertainty. More importantly, parliament will likely demand more transparency about the negotiation strategy. Moreover, the further procedures for Scotland remain unclear. Given the latest developments, a so-called “hard exit” now seems relatively likely, contrary to an initially expected “soft exit”, which would have allowed the UK to continue with most of its existing trade agreements with the EU.
The UK’s economy has only slightly started to slow down and has remained surprisingly robust. The PMI for manufacturing increased to a considerable level and stood at 56.1 in December, after 53.4 in November. Positively – and probably even more important for economic growth in the UK – the services sector PMI rose by one index point to 56.2 from 55.2 in November. Also, the momentum in industrial production recovered again to growth of 4.7% y-o-y. This comes after it had turned significantly negative in October, falling by 3.1% y-o-y, the largest decline since September 2013. Domestic consumption held up very well as retail values increased by 6.3% y-o-y in November, after an already considerable rise of 6.4% in October. This better-than-expected post-Brexit development has led to a slightly upward revision in growth estimates for 2016. The forecast for 2016 has been revised up to 2.0% from 1.9%. The 2017 growth forecast was also revised up by 0.3 pp to 1.1%. Nevertheless, the underlying assumption of a severe negative impact of the Brexit on the UK economy in the short term has not changed. But first it seems that the fallout will spread over a longer time horizon and may be counterbalanced by governmental support, at least to some extent.
The economic activity indicator published by Brazil’s central bank showed a decline in GDP of 3.9% y-o-y in October 2016. The decline eased during the first three quarters of 2016, contracting by 5.4%, 3.6% and 2.9% in 1Q16, 2Q16 and 3Q16, respectively. The Brazilian real was largely stable in December, somewhat depreciating by 0.3% m-o-m, following a 4.9% depreciation during the previous month. The central bank lowered its benchmark interest rate by 25 basis points (bp) to 13.75% in December as inflation continued to ease. Inflation decreased to 6.6% y-o-y in December, down from 7.4% a month earlier, which was the lowest rate since January 2015. The unemployment rate increased in November to another record-high level of 11.9%.
The services sector in Brazil continued to remain in recession in December, for the 22nd consecutive month, as Markit’s Brazil Services Business Activity Index remained well in contraction territory. The Index showed an ongoing fall in output, new orders and employment. Similarly, the manufacturing sector in December showed a sharper decline in production and new business, falling by the quickest rate seen in six months. Markit’s Brazil Manufacturing PMI dipped to a six-month low of 45.2 in December. Meanwhile, the consumer confidence index in December posted 75.6, which was lower than the 80.9 seen a month earlier.
Other relevant signals during 4Q16 did not significantly deviate from the previous quarter, suggesting a further contraction in GDP. The ongoing contraction in the services and manufacturing sectors will extend a negative impact on economic output into 1Q17. GDP is forecast to decelerate by 3.4% y-o-y in 2016, before showing minor cyclical growth of 0.4% in 2017.
GDP in Russia contracted by 0.4% y-o-y in 3Q16, the slowest pace since the onset of economic deceleration in 1Q15. Household consumption showed a slower decline of 3.1% y-o-y in 3Q16 compared to 5.2% seen in the previous quarter. Gross fixed capital formation (GFCF) also decreased by a notably slower pace, 0.5% y-o-y vs 4.3%. Exports increased nearly 7% y-o-y in 3Q16, from a largely unchanged level of exports in the previous quarter. Imports continued slowing for the 12th consecutive quarter, though at a lesser rate of 3.0% y-o-y, from 6.7% seen in 2Q16.
The downward inflationary trend continued in December posting 5.4%, its slowest rate of increase since June 2012. Following a depreciation of 2.7% in November, the Russian ruble appreciated 3.4% m-o-m in December. At the same time, the benchmark interest rate was kept unchanged at 10.0% by the country’s central bank.
The second successive improvement in Russia’s services sector was reported in December, with Markit’s Russia Services Business Activity Index rising to a 49-month high of 56.5. The three-month average, for the period October–December, is the highest since 1Q13. Despite this sizable expansion, retail sales continued to contract in November, though at a slower pace.
The manufacturing PMI survey reported the fastest employment growth in the manufacturing sector since March 2011 on a higher number of new orders. The sector gained momentum in December. The index posted a 69-month high of 53.7 in December, up from November’s 53.6. In line with marked improvements in the manufacturing sector, industrial production increased by 2.7% y-o-y in November, highlighting the fastest rate of increase in nearly two years.
The robust performance by services and manufacturing at the end of 2016 is expected to positively influence Russia’s GDP growth in 4Q16 and extend into 2017. GDP is now forecast to decelerate by 0.5% y-o-y in 2016 and return to the growth territory of around 0.9% in 2017.
India’s GDP growth is expected to show moderate improvement related to oil and commodity prices. It seems that there were strong negative shocks to GDP growth in late 2016 due to demonetisation in November. The Indian government is now pursuing a wide range of infrastructure projects, including development of major new industrial corridors and accelerating investment in railways and power infrastructure in order to support the economy in 2017.
A key fiscal reform due to be implemented in India in 2017 is the new goods and services tax (GST), which is expected to boost Indian GDP growth by about 0.15%-0.25% in and after 2017 and deliver significant efficiency gains to Indian industry by lowering the costs of logistics substantially. The GST reform will therefore provide a significant boost to the growth of India’s logistics industry, which is already growing at a double-digit pace, as well as lowering logistics costs for manufacturing companies, thereby improving their competitiveness within India and abroad. The GST will also result in the elimination of other indirect taxes, reducing double taxation. The authorities plan to roll out a range of taxation reforms as of fiscal year 2017/18 (April–March) to plug leakages, discourage tax treaty abuse and promote compliance through regulatory changes.
India’s CPI inflation eased to 3.6% y-o-y in November while its Wholesale Price Index (WPI) also moderated to 3.2% y-o-y. The self-inflicted cash crunch mainly responsible for the November easing is seen as keeping prices weak for another few months. A sharp moderation in food inflation for both retail and wholesale prices were behind the November inflation easing. High base effects and a fundamental improvement in food supply following a good harvest added to the sharp slowdown in private consumption caused by the government's surprise recall of 86% of cash in circulation in early November.
In terms of financial policies, on 2–3 January, the Indian Ministry of Finance and the Reserve Bank of India (RBI) released the issuance calendar for marketable debt securities for the remainder of fiscal year 2016/17 (April–March). According to the revised calendar, the government plans to borrow Rs 660 bn ($9.5 bn), which is Rs 180 bn less than in the previous calendar. It seems the adjustment to the government's borrowing plans indicates that tax revenues have exceeded the administration's expectations, leaving it with a higher than anticipated cash position.
Merchandise exports grew 2.3% y-o-y in November, extending the recovery in trade that began three months ago following a long spell of exports contraction. However, the pace of annual growth moderated, while exports dropped 13.8% in sequential terms. Imports, on the other hand, saw a faster rise in November to $33 bn, up 10.4% y-o-y and only 2% down in sequential terms. The improvement in imports was mainly driven by a surge in gold purchases, which jumped 23.2% y-o-y in value terms. Imports are also expected to rise further, driven by a higher oil imports bill and gold imports.
Despite the major disruption to the economy of the government's demonetisation, the recovery in exports continued in November, albeit at a slower pace. The supply chains of export-oriented businesses are less cash-dependent and thus were less affected by the post-demonetisation cash crunch.
In terms of investments, it seems gross fixed investment (according to national accounts figures) fell for three consecutive quarters in January–September 2016, weighing not just on economic growth, but also on employment prospects for India's rapidly growing workforce. Monetary easing by the RBI, which has cut its benchmark rate (the repurchase rate) by 175 bp since January 2015, has proved insufficient to revive industrial credit growth. According to the RBI, bank lending to industry even fell on a y-o-y basis in late 2016, which is the first time that it has contracted in the period for which data is available (since March 2008). The issuance of more corporate debt on bond markets did not make up for the decline in bank lending.
India’s PMI data for December indicated that the rupee demonetisation took a toll on manufacturing performance. Quantities of purchases were scaled back and employment lowered. Meanwhile, input costs increased at a quicker rate, whereas output charge inflation eased. The PMI was recorded below the crucial 50.0 threshold for the first time in 2016 during December. Down from 52.3 in November to 49.6, the latest reading was indicative of a marginal deterioration in the health of the sector. Nevertheless, the average of 52.1 over the October–December quarter was broadly in line with the 52.2 seen in the July-September period. Four of the five sub-components of the PMI edged below 50.0, while average delivery times lengthened further. The services PMI registered 46.8 in December, little changed from November’s reading of 46.7 and indicating a further solid contraction in output. Moreover, the downturn was broad-based by sub-sector, with the hotels and restaurants sub-component as the worst performer. With factory production also falling, activity across the private sector economy as a whole dipped to the greatest extent in over three years.
India’s GDP growth expectation for 2016 was revised down to 7.2% from 7.5% given some downward pressures stemming from supply side effects like post-demonetisation, a slowdown in private consumption and a likely further contraction in gross fixed investment, but GDP growth expectations for 2017 have been kept unchanged at 7.1%.
China’s growth held steady in November, as exports and consumption picked up, offsetting the investment slowdown (in part reflecting weaker real estate activity). As expected, housing sales growth slowed substantially to 7.7% y-o-y, following the introduction of housing purchase restrictions by local governments in more than 20 cities in early October. Overall, the data trends confirm that China is well placed to meet the GDP growth target of at least 6.5% in 2016 (the expectation is 6.7%). In 2017, China should benefit from a possible pick-up in US growth from a more expansionary fiscal policy there. But the increase in uncertainty and the risk of China-specific trade restrictions will weigh on exports. Overall, it seems there will be a slight improvement in the export outlook next year, helped by some strengthening of global demand and an 8% trade-weighted depreciation in the Chinese renminbi in the year to November. It seems China’s economy was stronger than expected in 4Q16. Rather than a modest overall deceleration, current indicators signal steady growth relative to 3Q16, albeit with a stronger lead by industry amidst slowing services and construction output. A housing correction is expected due to fairly consistent cyclical dynamics in China’s housing market over the last decade. While the housing correction is already building momentum, it is anticipated to deepen significantly in 1Q17.
Chinese exports grew 0.1% in November, the first expansion in eight months. Geographically, the improvement was due primarily to mid-to-high single-digit growth in exports to the EU and the US. Exports to Hong Kong and ASEAN fell at a slightly faster pace. Imports expanded by 6.7%, a 26-month high. Imports from the EU, ASEAN and Japan swung into strong growth, although they worsened from Korea.
China's foreign exchange reserves declined by $69.1 billion in November to $3.05 trillion, according to data from the State Administration of Foreign Exchange (SAFE). The pace of decline accelerated for the fourth straight month, and compares with average monthly declines of $36.5 billion in the last 12 months, or a record monthly decline of $107.9 billion in December 2015. The sharp declines in November largely preceded new "window guidance" on stricter oversight of capital outflows. While outflows are likely to continue owing to expectations of rising interest rates in the US, quantitative limitations or administration barriers on certain capital outflows should help stabilise this trend in the coming months, although they will create a higher regulatory burden for legitimate businesses. Even if capital outflows are controlled, foreign reserves will continue to decline in value, given that only about half of Chinese reserves are denominated in US dollars.
On 29 December 2016, the China Foreign Exchange Trade System (CFETS), a unit of the People's Bank of China, announced a revision to a basket of currencies used to manage the Chinese yuan (CNY) exchange rate. Starting 1 January 2017, the CFETS basket was re-weighted to accommodate 11 new currencies, bringing the total to 24 currencies from a prior 13. While the People’s Bank of China (PBoC) continues to manage the yuan mainly against the US dollar, it is considering additional room for depreciation with a revised basket for the Chinese yuan. The CFETS basket revision de-emphasizes the USD/CNY exchange rate, and thus provides additional room for depreciation. The addition of more currencies and the downward revision in the weight of the dollar provides room for China to continue to gradually depreciate its currency against the US dollar.
China's official PMI expanded at a slower pace of 51.4 in December. The slowdown was primarily due to the slower growth in output. The expansion of new orders was unchanged at a 29-month high. China's official non-manufacturing index slowed to 54.5. Total new orders expanded at a faster pace, but new export orders fell into contraction, indicating that the improvement was entirely domestic. The decline was entirely in the services sub-component, which slowed 0.5 points to 53.2, while the construction sub-component improved by 1.5 points to reach 61.9. The worsening PMI is unlikely to materially drag on real economic indicators for 4Q16. Despite modestly weaker sentiments in December, average manufacturing and non-manufacturing PMI readings were at their highest level of 2016 during 4Q. While deceleration is expected in indicators with recently unsustainable rapid growth – such as those related to housing and industry – decelerations will be more prominent in 2017 rather than in December. Going forward, the PMI is expected to worsen in January-February, following historic trends with sentiments worsening around the Chinese New Year celebrations.
OPEC Member Countries
The economy of Saudi Arabia expanded in real terms by 0.9% y-o-y in 3Q16. Gross value added in the oil sector increased by 3.6% y-o-y in 3Q16, up from 1.6% in the previous quarter, while that of the nonoil sector declined 0.7% y-o-y in 3Q16. The country’s non-oil private sector gained strength in December, according to Emirates NBD’s Saudi Arabia PMI. The index increased to a level of 55.5 last month, up from 55 in November, on rising output and promising market demand for goods and services.
In Nigeria, the slowdown in private sector economic activity eased last month, as the PMI reached a five-month high of 48.1, up from November’s 47.7. A slower decline in output and new export orders, together with a lesser increase in output prices, were behind this improvement. Nigeria’s GDP decreased by 2.3% y-o-y in 3Q16, according to the country’s National Bureau of Statistics.
The economy of Qatar grew by 3.7% y-o-y in 3Q16, up from 1.9% in the previous quarter. The contraction in gross value added in manufacturing eased from 4.4% in 2Q16 to 1.3% in 3Q16. The value added of construction activity continued growing at robust levels.
The UAE’s non-oil private sector ended 2016 on a positive note with the PMI survey showing the quickest growth of output in 16 months. The index rose to 55 in December, from November’s 54.2. It also showed that new orders for exports increased in December for the first time since July. Inflation recorded 1.9% y-o-y in October, its highest since February 2016.
The deceleration in exports by their sharpest pace since October 2015 from Indonesia’s manufacturing sector during December, caused manufacturing output to decline according to the Nikkei Indonesia Manufacturing PMI. It dropped to 49.0 in December, from 49.7 a month earlier. GDP grew 5.0% y-o-y in 3Q16. Private consumption expenditure rose 5.0% y-o-y, while general government consumption expenditure dropped by nearly 3.0% y-o-y. The exports of goods and services fell by 6.0% and imports also declined by 3.9%.
In the Philippines, GDP growth accelerated to 7.1% y-o-y in 3Q16, the fastest pace in three years. Private consumption expenditure grew by 7.3% y-o-y, government consumption by 3.1%, capital formation by 20%, exports of goods and services by 8.8% and imports by 14.2%. The country’s manufacturing sector continued to grow in December, though at slower pace from the previous month on a slower increase in new orders.
The manufacturing sector in Thailand had its first expansion in eight months in December according to the Nikkei Thailand Manufacturing PMI. The index registered 50.6 last month, up from 48.2 in November, on improvements in production and total new orders, together with the first expansion in employment in 2016.
In Egypt, GDP grew 4.5% y-o-y in 2Q16, up from 3.7% in the previous quarter on the vast increase in GFCF, which grew by 26% y-o-y in 2Q16 compared to a 4.9% increase in 1Q16. Public sector consumption also posted a notable expansion of 4.8% y-o-y, up from 2.0%. The decline in exports continued, but eased markedly in 2Q16 at 2.4% y-o-y versus a drop of more than 18% in the previous quarter.
In South Africa, GDP sustained its low growth path in 3Q16, growing 0.7% y-o-y similar to the previous quarter. Private consumption increased by 1.1% y-o-y in 3Q16, up from 0.8% in 2Q16, while government consumption was growing slower at 1.1% y-o-y vs 1.5% in the previous quarter. GFCF contracted by 6.1% y-o-y, the most since 2Q10, and exports declined by 3.9% y-o-y, the first drop since the financial crisis of 2008/09.
In Argentina, the big shift in economic policies seen under the new government as of December 2015 has coincided with unfavourable externalities leading to a sharp contraction in output. GDP contracted 3.8% y-o-y in 3Q16, following a 3.7% decline in the previous quarter. Decelerations in private consumption (by 3.1%), GFCF (by 7.5%) and the exports of goods and services (by 2.6%) were the triggers of this contraction in GDP. Imports, on the other hand, were 0.6% lower in 3Q16, after increasing in the previous five successive quarters. Inflation grew by more than 40% y-o-y during April November 2016 on the back of the currency depreciation of more than 53% between December 2015 and December 2016.
GDP in the Czech Republic expanded 1.6% y-o-y in 3Q16, signaling the lowest rate of growth since 4Q13 on slower growth in both household and public consumption, and exports, alongside shrinkage in GFCF. The country’s manufacturing sector had better business conditions at the end of 2016 on faster growth in production, new orders and job creation. Thus, its respective PMI increased to 53.8 in December, up from 52.2 in November, its highest reading in nine months.
The economy of Hungary grew by 2.2% y-o-y in 3Q16, compared to a 2.9% in the previous quarter. While public consumption shrank by 0.9%, private expenditure grew by 4.6%. Following a big drop in GFCF by more than 12% in 2Q16, it returned to growth with a rise of 1.5% in 3Q16. Growth in exports decelerated from 9.5% y-o-y in 2Q16 to 4.6% in the next quarter. Imports also increased by a lower rate of 5.3% in 3Q16 from 8.0% in the previous quarter.
Oil prices, US dollar and inflation
The US dollar gained in December against all major currencies with the exception of the British pound sterling and the Canadian dollar. On average, the US dollar gained 7.7% against the Japanese yen, after having already increased against it around 14% in the last four months. The dollar gained 2.6% both against the Euro and the Swiss franc. In contrast, the dollar declined slightly by 0.5% against the pound sterling amid uncertainties remaining regarding the Brexit negotiations between the UK and the EU.
Compared with the Chinese yuan, the US dollar rose by 1.2% m-o-m on average in December– and it has advanced by around 4% in the last four months. It increased by 0.4% m-o-m against the Indian rupee. Compared with the Brazilian real, the dollar increased by 0.3% m-o-m on average, but declined by 3.4% against the Russian ruble, mainly due to the impact of higher oil prices.
Against the currencies of NAFTA trading partners, the US dollar on average ended up by 2.9% against the Mexican peso after already having advanced against it by 5.3% the previous month, mainly due to an uncertain outlook for trade relations with the US. This trend of appreciation continued into the beginning of 2017 after some US companies scaled back their investment plans in Mexico to avoid potential tariffs. Meanwhile, the US dollar decreased by 0.7% against the Canadian dollar.
The US dollar increases mainly continue to reflect the expected tightening of monetary policy by the US Fed as the US economy approaches its policy goals, while at the same time, the central banks of the majority of its major currency counterparts are expected to remain relatively more accommodative. The Fed’s economic projections released at its December meeting showed a median projected path of a federal funds rate slightly above the path discussed at the September meeting.
In nominal terms, the price of the OPEC Reference Basket increased by $8.45, or 19.6%, from $43.22/b in November to $51.67/b in December. In real terms, after accounting for inflation and currency fluctuations, the Basket increased to $36.59/b from $29.98/b (base June 2001=100). Over the same period, the US dollar advanced by 2.1% against the import-weighted modified Geneva I + US dollar basket*, while inflation stayed flat.